Tuesday, November 20, 2012

The Question We’d Like to Have Heard Today

When your company reports a loss per share of
$6.41, or roughly half your own stock price, thanks in good measure to the
write-off of most of the book value of a $10 billion acquisition [actually $11.1 billion by the time it closed thanks to currency moves] you made barely one year ago, you should probably let more than nine analysts ask questions on the earnings call…especially when you’re going to blame almost everybody
but your own employees for the horrible, terrible, no-good, very bad
acquisition.

But HP management, keeping up a pattern of
playing the Wall Street fiddle about as well as a public company management can
play it, did just that, mainly by yammering for a very long period of time from
the “script” before opening the call to questions.

Here’s how CEO Meg Whitman (not the architect
of the Autonomy acquisition, but now serving as the undertaker) spun the deal
before the Q&A:

“Autonomy
remains a work in progress as we move this business from start up to grown up.
There is a big market opportunity for this business but operational
improvements are needed to take full advantage of these opportunities. While we
expect these efforts will improve the future of our Autonomy business, we
announced today an $8.8 billion non-cash impairment charge related to Autonomy.
Let me spend a moment giving you some detail about the situation.

“The majority of
this impairment charge is linked to serious accounting improprieties,
disclosure failures, and out right misrepresentations that occurred prior to
HP's acquisition of Autonomy [emphasis added] and the associated impact on the expected
financial performance of the business over the long term. The balance of the
impairment charge is linked to the recent trading value of HP stock. These
improprieties were discovered through an internal investigation after a senior
member of Autonomy's leadership team came forward following the departure of
Mike Lynch on May 23.

“Based
on this information, HP initiated an intense internal investigation into the
allegations, including a third party forensic review of Autonomy's historical
financial results. HP has contacted the SEC's Enforcement Division and the UK's
Serious Fraud Office. We have requested that both agencies open criminal and
civil investigations into this matter. In addition, HP intends to seek regress
against various parties in the appropriate civil courts to recoup what we can
for our shareholders.

“I
want to stress that we remain 100% committed to Autonomy and its industry
leading technology. We will continue to fully support our new and existing
customers and we believe Autonomy's technology will play a significant role in
our growth strategy over the long term. To that end, we recently announced
Robert Youngjohns as Senior Vice President and General Manager our Autonomy IM
business unit. Robert is a seasoned software executive who was most recently
President of Microsoft North America.”

The second way HP assured itself of a Q&A
session lacking fireworks was that those nine analysts who were allowed to ask
questions are all polite sell-siders, as opposed to actual, angry HP
shareholders.And polite sell-siders are
not going to ask the really juicy questions you’d want to hear asked.Still, the first analyst, Ben Reitzes, of
Barclays, gave it a reasonable shot out of the gate:

Ben Reitzes

“Yes, thanks a lot. Meg, with regard to
the Autonomy situation, we understand what you're doing in terms of going after
the folks that you feel misled you but what about internally? Whose responsible
internally for the acquisition, how are you analyzing yourself internally, the
Board, I think everybody at the Board was there when the Autonomy decision was
made except for Mr. Whitworth, so what's the, what are you doing internally to
make sure that you have the right processes and who are you holding accountable
internally if anyone to make sure this doesn't happen again and that maybe even
there's some folks internally that need to be held responsible and we could see
repercussions of this in the near future. How are you looking at it internally?”

Meg Whitman

“Yes,
well first of all, the CEO at the time and the Head of Strategy who lead this
deal are both gone...[emphasis added] With regard to the Board you're right. Most of the Board
was here and voted for this deal and we feel terribly about that. What I will
say is the Board relied on audited financials, audited by Deloitte, not Brand X
accounting firm but Deloitte and by the way, during our very extensive due
diligence process, we hired KPMG to audit Deloitte, and neither of them saw
what we now see after someone came forward to point us in the right direction.
That said, obviously, we have not done any big acquisitions and we will review
the acquisition process.

“What
I will say is due diligence and M&A now reports to our Chief Financial
Officer. At the time when I came to the Company I was surprised to find that
due diligence and M&A reported to strategy as opposed to the Chief
Financial Officer. I've never seen that before in my career and that's a
decision I made right away before I knew any of this, so I understand your
point of view and we have made a few changes in that regard but in the end, you have to
rely on audited financials [emphasis added] and we did and we will now carry on and
as you know we've reported this to the SEC as well as the serious fraud office
and we will take it from here.”

Ben Reitzes

“And
in terms of internal personnel though, based on what you see right now the
organization can remain stable based on this occurrence?”

Meg Whitman

“Yes,
it can. I mean really the two people that should have been held responsible are
gone and that's the way I see it right now so I feel good about sort of the
stability it of leadership.”

Longtime readers can see where we’re going
with this.

According to HP’s CEO, there were only “two
people” in all of HP who “should have been held responsible” for the Autonomy
acquisition, which saw the evaporation in about a year of nearly all the value ascribed to what $11 billion worth of HP’s cash had been used to buy, and both
those “two people” are happily gone.

But
if my friend, fellow blogger and ace hedge fund manager John Hempton could have
told me the Autonomy books were well and truly “dodgy” way
before today’s news, based strictly on a reading of the same “audited
financials” that HP’s CEO said today “you have to rely on”...then where on
earth was HP’s entire senior management team, which presumably contains a few
people who know as much about how the audited financials of a software company
should look as a guy in Australia reading 10Ks and 10Qs, when this deal
was getting done? Out of the office making a Peets coffee run?

Jeff Matthews

Author “Secrets in Plain
Sight: Business and Investing Secrets of Warren Buffett”

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